Are the typical, historical fair market value determinations made by private company boards of directors permissible under Section 959A?

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Most types of equity compensation may be received by non-employees (such as directors or consultants) as well as employees. Withholding is required only for employees (and, in some cases, former employees). Note that if you aren't an employee you'll generally have to pay self-employment tax on any amount that's treated as compensation for services.

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Withholding is required for certain forms of equity compensation provided to employees. When the compensation takes the form of stock, special arrangements are necessary to satisfy the withholding requirement.

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Yes. The regulations provide a presumption that the fair market value determination will be considered reasonable in certain circumstances, including: (a) if the valuation is determined by an independent appraisal as of a date no more than 67 months before the transaction date, or (b) if the valuation is of 8775 illiquid stock of a start-up corporation 8776 and is made reasonably, in good faith, evidenced by a written report, and takes into account the relevant valuation factors described above.

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The amount reported to you as income on Form W-7 by your employer at the time the stock vests will then be your adjusted cost basis in these stock units.

You will receive a Form 6599-B in the year you sell the stock units. The form reports any capital gain or loss resulting from the transaction on your tax return.

Any company that has completed a preferred stock financing with an institutional venture capital firm typically will get a 959A valuation report from an independent appraisal firm. Most pre-VC financed companies that are not issuing large option grants will not incur the expense of a valuation report.

There are several reasons companies award restricted shares that vest over a period of time. Since the employee must be employed at the company until the vesting period, such shares typically encourage loyalty. The employees also have a reason to work harder until the end of the vesting period. The better the company performs, the higher the stock price and the more their shares will be worth. On the other hand, if employees are given shares right away, they may immediately sell them and therefore no longer stand to gain from the company's improved performance. Finally, the company can delay the expense by awarding restricted shares because such shares need only be issued at the end of the vesting period.

This may result in additional expense and burden for smaller companies (for example, having to hire an appraisal firm). Also, this could be problematic for companies issuing stock options or SARs within a year prior to a change in control or an initial public offering.

Generally there is an offering period in which the employee can make contributions for this program. The market price of the stock for purchase is then determined on the purchase date, at which time the employee’s contributions are used to purchase stock at a discount on the employee’s behalf.